UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission file number: 0-26277
WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified on its charter)
Delaware 98-0204758
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One East Uwchlan Avenue
Suite 301
Exton, PA 19390
(Address of principal executive offices)
(610) 903-0400
(Registrant's telephone number, including area code)
140 South Village Avenue
Suite 20
Exton, PA 19341
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 3,821,385 shares issued and
outstanding as of March 9, 2005.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 Condensed consolidated balance sheets at January 31, 2005 (unaudited) and
April 30, 2004 3 - 4
Condensed consolidated statements of operations for the three and nine
months ended January 31, 2005 and 2004 (unaudited) 5
Condensed consolidated statement of shareholders' equity for the nine
months ended January 31, 2005 (unaudited) 6
Condensed consolidated statements of cash flows for the nine months ended
January 31, 2005 and 2004 (unaudited) 7 - 8
Notes to unaudited condensed consolidated financial statements 9 - 20
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 21 - 32
ITEM 3 Controls and Procedures 33
PART II OTHER INFORMATION
ITEM 1 Legal proceedings 34
ITEM 2 Unregistered sales of equity securities and use of proceeds 34 -35
ITEM 3 Defaults upon senior securities 35
ITEM 4 Submission of matters to a vote of security holders 35
ITEM 5 Other information 35
ITEM 6 Exhibits 35
SIGNATURES 36
2
WPCS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JANUARY 31, APRIL 30,
ASSETS 2005 2004
---------------------- ---------------------
(Unaudited) (Note 1)
CURRENT ASSETS:
Cash and cash equivalents $ 2,294,544 $ 1,984,636
Accounts receivable, net of allowance of $58,779 at
January 31, 2005 and $61,779 at April 30, 2004 8,990,505 5,909,879
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,165,362 2,123,031
Inventory 795,809 104,799
Prepaid expenses 319,086 264,076
Deferred income taxes 72,000 60,000
---------------------- ---------------------
Total current assets 14,637,306 10,446,421
PROPERTY AND EQUIPMENT, net 1,615,594 1,005,760
CUSTOMER LISTS 681,750 603,333
BACKLOG 32,500 -
GOODWILL 13,649,794 8,681,870
OTHER ASSETS 180,924 144,713
---------------------- ---------------------
Total assets $ 30,797,868 $ 20,882,097
====================== =====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
WPCS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
JANUARY 31, APRIL 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
---------------------- ---------------------
(Unaudited) (Note 1)
CURRENT LIABILITIES:
Borrowings under lines of credit $ 353,131 $ 551,000
Current maturities of capital lease obligation 2,731 2,534
Current maturities of loans payable 177,016 94,056
Accounts payable and accrued expenses 5,998,043 4,732,200
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,515,607 2,162,452
Due to shareholders 73,245 88,157
Income taxes payable 119,523 223,753
Deferred income taxes 219,000 196,100
---------------------- ---------------------
Total current liabilities 8,458,296 8,050,252
Capital lease obligation, net of current portion - 2,073
Loans payable, net of current portion 348,277 170,362
Due to shareholders, net of current portion 1,026,755 1,026,755
Deferred income taxes 290,000 344,900
---------------------- ---------------------
Total liabilities 10,123,328 9,594,342
---------------------- ---------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares authorized,
none issued - -
Common Stock - $0.0001 par value, 75,000,000 shares authorized,
3,820,835 and 1,737,498 shares issued and outstanding at
January 31, 2005 and April 30, 2004, respectively 382 174
Additional paid-in capital 21,131,084 11,993,387
Unearned consulting services - (38,559)
Accumulated deficit (456,926) (667,247)
---------------------- ---------------------
Total shareholders' equity 20,674,540 11,287,755
---------------------- ---------------------
Total liabilities and shareholders' equity $ 30,797,868 $ 20,882,097
====================== =====================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
WPCS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
2005 2004 2005 2004
--------------- -------------- -------------- ---------------
REVENUE $11,440,977 $4,552,300 $29,015,396 $13,874,616
--------------- -------------- -------------- ---------------
COSTS AND EXPENSES:
Cost of revenue 8,547,327 3,444,374 21,881,729 10,084,508
Selling, general and administrative expenses 2,511,539 1,416,104 6,312,547 3,956,611
Depreciation and amortization 183,745 99,999 430,438 254,214
--------------- -------------- -------------- ---------------
Total costs and expenses 11,242,611 4,960,477 28,624,714 14,295,333
--------------- -------------- -------------- ---------------
OPERATING INCOME (LOSS) 198,366 (408,177) 390,682 (420,717)
OTHER EXPENSE:
Interest expense 5,862 1,214 18,625 9,410
--------------- -------------- -------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX (PROVISION) BENEFIT 192,504 (409,391) 372,057 (430,127)
Income tax (provision) benefit (89,841) 86,800 (161,736) (4,200)
--------------- -------------- -------------- ---------------
NET INCOME (LOSS) $102,663 ($322,591) $210,321 ($434,327)
=============== ============== ============== ===============
Basic net income (loss) per common share $0.03 ($0.19) $0.09 ($0.30)
=============== ============== ============== ===============
Diluted net income (loss) per common share $0.03 ($0.19) $0.09 ($0.30)
=============== ============== ============== ===============
Basic weighted average number of common
shares outstanding 3,458,516 1,677,974 2,311,171 1,464,482
=============== ============== ============== ===============
Diluted weighted average number of common
shares outstanding 3,462,575 1,677,974 2,355,155 1,464,482
=============== ============== ============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
WPCS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 2005
(Unaudited)
Additional Unearned Total
Preferred Stock Common Stock Paid-In Consulting Accumulated Shareholders'
Shares Amount Shares Amount Capital Services Deficit Equity
------- ------- ----------- ------- ------------ --------- ----------- ------------
BALANCE, APRIL 30, 2004 (Note 1) - $- 1,737,498 $174 $11,993,387 ($38,559) ($667,247) $11,287,755
Net proceeds from issuance of common stock
through private placement - - 2,083,337 208 9,137,697 - - 9,137,905
Amortization of unearned consulting services - - - - - 38,559 - 38,559
Net income - - - - - - 210,321 210,321
------- ------- ----------- ------- ------------ --------- ----------- ------------
BALANCE, JANUARY 31, 2005 - $- 3,820,835 $382 $21,131,084 $- ($456,926) $20,674,540
======= ======= =========== ======= ============ ========= =========== ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
WPCS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
January 31,
2005 2004
----------------- -----------------
OPERATING ACTIVITIES :
Net income (loss) $210,321 ($434,327)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 430,438 254,214
Provision for doubtful accounts - 35,669
Amortization of unearned consulting services 38,559 187,620
Deferred income taxes (65,948) (86,800)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (945,873) (349,310)
Costs and estimated earnings in excess of billings on uncompleted contracts (42,331) (332,808)
Inventory (446,957) 5,451
Prepaid expenses 15,437 (30,134)
Other assets (30,211) (11,536)
Accounts payable and accrued expenses 132,907 255,801
Billings in excess of costs and estimated earnings on uncompleted contracts (646,845) 658,377
Income taxes payable (103,643) (4,183)
----------------- -----------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,454,146) 148,034
----------------- -----------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (151,114) (57,142)
Acquisition of Clayborn, net of cash received - (822,381)
Acquisition of Quality, net of cash received (6,709,678) -
Acquisition earn-out and other transaction costs (113,518) (394,211)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (6,974,310) (1,273,734)
----------------- -----------------
FINANCING ACTIVITIES:
Repayment of advances from officers - (100,000)
Net proceeds from issuance of common stock 9,137,905 2,204,691
(Repayments) borrowings under lines of credit (332,998) 100,000
Repayments of loans payable (64,667) (150,417)
Payments of capital lease obligations (1,876) (1,699)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,738,364 2,052,575
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 309,908 926,875
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,984,636 167,547
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,294,544 $1,094,422
================= =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
WPCS INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Nine Months Ended
January 31,
2005 2004
------------------ -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $20,439 $11,134
================== =================
Income taxes $424,708 $105,456
================== =================
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisition of Clayborn $ - $867,468
================== =================
Conversion of Series C preferred stock to common stock $ - $179
================== =================
Unpaid earn-out consideration relating to acquisitions $ - $1,203,016
================== =================
Issuance of notes for property and equipment $139,033 $ -
================== =================
Reversal of accruals established in purchase accounting $49,790 $ -
================== =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
8
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for quarterly reports on Form 10-QSB and do not include all
of the information and footnote disclosures required by accounting principles
generally accepted in the United States of America. Accordingly, the unaudited
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the fiscal year ended April 30, 2004 included in the Company's annual report on
Form 10-KSB. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring adjustments)
which are, in the opinion of the management, considered necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods. Operating results for the three and nine month periods ended
January 31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending April 30, 2005. Certain reclassifications
have been made to prior period financial statements to conform to the current
presentation.
The accompanying unaudited condensed consolidated financial statements include
the accounts of WPCS International Incorporated ("WPCS") and its wholly-owned
subsidiaries, WPCS Incorporated , Invisinet, Inc. ("Invisinet"), Walker Comm,
Inc. ("Walker"), Clayborn Contracting Group, Inc. ("Clayborn") from August 22,
2003 (date of acquisition), Heinz Corporation ("Heinz") from April 2, 2004 (date
of acquisition), and Quality Communications & Alarm Company ("Quality") from
November 24, 2004 (date of acquisition), collectively the "Company".
The Company is an engineering company that focuses on the implementation
requirements of wireless technology and specialty communication systems. The
company provides a range of services including site design, product integration,
security, structured cabling, construction, project management and technical
support.
Effective January 10, 2005, a majority of the Company's shareholders approved a
one-for-twelve reverse stock split of the Company's common stock, decreasing the
number of issued and outstanding shares of common stock from 45,849,976 shares
to 3,820,835 shares. The par value of the common stock was not affected by the
reverse stock split and remains at $0.0001 per share. Consequently, the reverse
stock split has been reflected retroactively in the accompanying financial
statements and notes for all periods presented and all applicable references as
to the number of common shares and per share information, stock options,
warrants and market prices have been restated to reflect this reverse stock
split. In addition, shareholders' equity has been restated for all periods
presented for the aggregate par value of the number of common shares that were
reclassified to additional paid-in capital as a result of the reverse stock
split.
On August 22, 2003, the Company acquired all of the outstanding shares of
Clayborn in exchange for an aggregate of 68,871 newly issued shares of the
Company's common stock with a fair value of approximately $868,000 and $900,000
cash consideration. An additional $1,100,000 is due by September 30, 2007,
payable in quarterly distributions, by payment to the Clayborn shareholders of
50% of the quarterly post-tax profits, as defined, of Clayborn and a final
payment of any remaining balance on that date.
9
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On April 2, 2004, the Company acquired all of the outstanding common stock of
Heinz for $1,000,000, as follows: (1) $700,000 of the Company's common stock,
based on the closing price of its common stock on March 30, 2004 of $11.76 per
share, for an aggregate of 59,524 newly issued shares of the Company's common
stock and (2) $300,000 total cash consideration, of which $100,000 was paid at
closing and a $200,000 non-interest bearing promissory note. Of the $200,000,
$75,000 is payable on the first and second anniversaries of the closing date and
$50,000 is payable on the third anniversary of the closing date.
On November 24, 2004, the Company acquired all of the outstanding common stock
of Quality for approximately $6,700,000 in cash, subject to adjustment.
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
A summary of selected significant accounting policies consistently applied in
the preparation of the accompanying condensed consolidated financial statements
follows (additional policies are set forth in the Company's annual report on
Form 10-KSB):
Goodwill
In accordance with the guidelines of Statement of Financial Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," goodwill and indefinite-lived
intangible assets are no longer amortized but are assessed for impairment on at
least an annual basis. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment.
SFAS No. 142 requires that goodwill be tested for impairment upon adoption and
at least annually thereafter, utilizing a two-step methodology. The initial step
requires the Company to determine the fair value of the business acquired
(reporting unit) and compare it to the carrying value, including goodwill, of
such business (reporting unit). If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be impaired.
The amount, if any, of the impairment is then measured in the second step.
The Company determined the fair value of the businesses acquired for purposes of
this test primarily by using a discounted cash flow valuation technique.
Significant estimates used in the valuation include estimates of future cash
flows, both future short-term and long-term growth rates, and estimated cost of
capital for purposes of arriving at a discount factor. The Company performs its
annual impairment test during the fourth quarter absent any interim impairment
indicators.
10
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes in goodwill during the nine months ended January 31, 2005 are as
follows:
Beginning balance, May 1, 2004 $ 8,681,870
Reversal of accruals established in purchase accounting (49,790)
Transaction costs 7,249
Heinz acquisition cost adjustments (217,409)
Quality acquisition 5,227,874
---------------
Ending balance, January 31, 2005 $13,649,794
===============
Revenue recognition
The Company generates its revenue by providing project engineering and
deployment services for wireless infrastructure services and specialty
communication systems The Company provides a range of engineering services
including, site design, construction, product integration, structured cabling,
network security, project management and technical support.
The Company records revenue and profit on these contracts on a
percentage-of-completion basis using the cost-to-cost method. Contracts in
process are valued at cost plus accrued profits less earned revenues and
progress payments on uncompleted contracts. Contracts are generally considered
substantially complete when engineering is completed and/or site construction is
completed. The Company includes in operations pass-through revenue and costs on
cost-plus contracts, which are customer-reimbursable materials, equipment and
subcontractor costs, when the Company determines that it is responsible for the
engineering specification, procurement and management of such cost components on
behalf of the customer.
The Company has numerous contracts that are in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue
recognition. Cost estimates are reviewed monthly on a contract-by-contract
basis, and are revised periodically throughout the life of the contract such
that adjustments to profit resulting from revisions are made cumulative to the
date of the revision. Significant management judgments and estimates, including
the estimated cost to complete projects, which determines the project's percent
complete, must be made and used in connection with the revenue recognized in the
accounting period. Current estimates may be revised as additional information
becomes available. If estimates of costs to complete long-term contracts
indicate a loss, provision is made currently for the total loss anticipated.
Earnings (Loss) Per Share
Earnings (loss) per common share is computed pursuant to SFAS No. 128, "Earnings
Per Share" ("EPS"). Basic income (loss) per share is computed as net income
(loss) divided by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur from
common stock issuable through stock options, restrictive stock awards, warrants
and other convertible securities.
11
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At January 31, 2005, the Company had 394,024 stock options and 2,509,121
warrants outstanding. At January 31, 2004, the Company had 263,540 stock options
and 425,784 warrants outstanding.
For the three months ended January 31, 2005, 369,926 stock options and 2,509,121
warrants were not included in the computation of fully diluted earnings per
share, because the stock option and warrant exercise prices exceeded the market
price of the common stock and, therefore, the effects would be antidilutive. The
assumed conversion of the remaining 24,098 stock options resulted in a 4,059
share increase in weighted average shares for fully diluted earnings per share.
For the nine months ended January 31, 2005, 190,759 stock options and 2,509,121
warrants were not included in the computation of fully diluted earnings per
share, because the stock option and warrant exercise prices exceeded the market
price of the common stock and, therefore, the effects would be antidilutive. The
assumed conversion of the remaining 203,265 stock options resulted in a 43,984
share increase in weighted average shares for fully diluted earnings per share.
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. The most significant estimates relate to the calculation of percentage
of completion on uncompleted contracts, allowance for doubtful accounts,
valuation of inventory, useful life of customer lists, deferred tax valuation
allowance and the fair values of the assets and liabilities of purchased
businesses. Actual results could differ from those estimates.
NOTE 3- ACQUISITIONS
In accordance with SFAS No. 141, "Business Combinations," acquisitions are
accounted for under the purchase accounting method of accounting. Under the
purchase method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill is recorded to the extent the
merger consideration, including certain acquisition and closing costs, exceeds
the fair value of the net identifiable assets acquired at the date of the
merger.
Clayborn
On August 22, 2003, the Company completed a merger with Clayborn, a California
corporation. The acquisition of Clayborn gives the Company expertise in
engineering and deployment services for specialty communication systems and
additional wireless opportunities to pursue.
The aggregate consideration paid by the Company for Clayborn was approximately
$2,932,000. The Company acquired all of the issued and outstanding shares of
Clayborn in exchange for $900,000 cash consideration and $64,000 of transaction
costs, and 826,446 newly issued shares of the Company's common stock with a fair
value of approximately $868,000 based on the average value of the Company's
common stock as of a few days before and after the merger terms were agreed to
and announced. An additional $1,100,000 is due by September 30, 2007, payable in
quarterly distributions, by payment to the Clayborn shareholders of 50% of the
quarterly post tax profits of Clayborn.
12
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 134,218
Accounts receivable 575,804
Costs in excess of billings 231,562
Income tax refunds receivable 104,765
Inventory 39,000
Fixed assets 444,126
Backlog 13,500
Customer list 245,000
Other assets 97,669
Goodwill 1,775,447
-------------------
3,661,091
-------------------
Liabilities assumed:
Accounts payable (294,992)
Accrued expenses (136,119)
Notes payable (184,611)
Deferred tax liability (113,800)
-------------------
(729,522)
-------------------
Purchase price $ 2,931,569
===================
Heinz
On April 2, 2004, the Company acquired all of the issued and outstanding common
stock of Heinz for $1,000,000, as follows: (1) $700,000 of the Company's common
stock, based on the closing price of our common stock on March 30, 2004 of
$11.76 per share, for an aggregate of 59,524 newly issued shares of the
Company's common stock and (2) $300,000 total cash consideration, of which
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. The purchase price includes the present value of the note totaling
$182,648, discounted at 5%. The initial current and long-term discounted present
value at April 2, 2004 of this note was $71,429 and $111,219, respectively.
Heinz is a St. Louis, Missouri based provider of in-building wireless
infrastructure services for both cellular and WiFi applications, including
consulting, integration and installation services for wireless infrastructure.
In addition, Heinz has performed fixed wireless services, structured cabling,
and cellular base station equipment installation and testing. The acquisition of
Heinz gives the Company additional project engineering expertise for wireless
infrastructure services, broadens its customer base, and expands its
geographical presence in the Midwest.
13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A valuation of certain assets was initially completed, including property and
equipment, backlog, list of major customers, and the Company internally
determined the fair value of its other assets and liabilities. In determining
the fair value of acquired assets, standard valuation techniques were used
including the market and cost approaches. The initial purchase price allocation
has been adjusted as a result of final valuation during the three months ended
January 31, 2005, with fixed assets increasing in value by $24,000, customer
lists being valued at $220,000 and backlog being valued at $65,000, resulting in
a decrease in goodwill by these combined amounts. Accordingly, a deferred tax
liability of $91,000 was recorded since the amortization of customer lists and
backlog is not available as a tax deduction to the Company. The aggregate
changes resulted in goodwill being decreased to approximately $803,000 as of the
acquisition date.
The purchase price allocation, as adjusted, has been determined as follows:
Assets purchased:
Cash $8,052
Accounts receivable 603,435
Costs in excess of billings 103,459
Fixed assets 47,440
Customer lists 220,000
Backlog 65,000
Other assets 71,128
Goodwill 803,208
---------------------
1,921,722
---------------------
Liabilities assumed:
Accounts payable (494,503)
Accrued expenses (130,694)
Line of credit (90,000)
Notes payable (80,942)
Billings in excess of cost (29,223)
Deferred tax liability (91,000)
---------------------
(916,362)
---------------------
Purchase price $ 1,005,360
=====================
Quality
On November 24, 2004, the Company acquired all of the outstanding shares of
Quality for $6,700,000 in cash, subject to adjustment. Based on the preliminary
information currently available, the acquisition resulted in goodwill of
approximately $5,228,000. Upon completion of a formal purchase price allocation,
there may be a decrease in the amount assigned to goodwill and a corresponding
increase in tangible or other intangible assets.
Quality is a Lakewood, New Jersey based provider of specialty communication
services. The acquisition of Quality gives the Company additional project
engineering expertise for specialty communication opportunities, broadens its
customer base especially in the public safety sector and gaming industry, and
expands its geographic presence in the Northeastern United States. The financing
for this transaction was completed through the issuance of common stock as
described in Note 8.
14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The preliminary purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 163,674
Accounts receivable 2,136,753
Inventory 244,053
Fixed assets 526,346
Prepaid expenses 70,447
Other assets 6,000
Goodwill 5,227,874
----------------
8,375,147
----------------
Liabilities assumed:
Accounts payable (912,736)
Accrued expenses (271,991)
Deferred income taxes (21,948)
Income taxes payable 587
Line of credit borrowings (135,129)
Notes payable (160,578)
----------------
(1,501,795)
----------------
Purchase price $ 6,873,352
================
15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Quality as if the acquisition had
occurred on May 1, 2004, and the Company, Clayborn, Heinz and Quality, as if the
acquisitions had occurred on May 1, 2003, after giving effect to certain
adjustments, including the issuance of the Company's common stock to Clayborn
and Heinz as part of the purchase price, and the issuance of common stock
described in Note 8 to finance the acquisition of Quality. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company, Clayborn, Heinz, and Quality been a
single entity during these periods.
Three months ended Nine months ended
January 31, January 31, January 31, January 31,
2005 2005 2005 2004
----------------- ------------------ ---------------- ----------------
Revenue $12,323,719 $7,414,956 $36,394,749 $24,714,651
Net income (loss) $60,733 ($227,077) $293,452 ($326,672)
Weighted average number of shares used in
calculation:
Basic net income (loss) per share 3,820,835 3,820,835 3,820,835 3,676,214
Diluted net income (loss) per share 3,824,894 3,820,835 3,864,819 3,676,214
Pro forma net income (loss) per common share
Basic $0.02 ($0.06) $0.08 ($0.09)
Diluted $0.02 ($0.06) $0.08 ($0.09)
For all acquisitions, customer lists are amortized over a period of five years
and backlog is amortized over a period of one year from the date of acquisition.
The Company recorded amortization expense related to customer lists and backlog
of $85,000 and $27,000 for the three months ended January 31, 2005 and 2004,
respectively, and $163,000 and $81,000 for the nine months ended January 31,
2005 and 2004, respectively. Any future goodwill impairments are not deductible
for income tax purposes.
16
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following
at January 31, 2005:
Costs incurred on uncompleted contracts $20,892,557
Estimated contract profit 4,678,857
---------------
25,571,414
Less: billings to date 24,921,659
---------------
Net costs in excess $649,755
===============
Costs and estimated earnings in excess of billings $2,165,362
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,515,607
---------------
Net costs in excess $649,755
===============
NOTE 5 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the nine months ended January 31, 2005, $66,000 was
paid as rent for this lease.
In connection with the acquisition of Clayborn, an additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions to the Clayborn
shareholders, by payment of 50% of the quarterly post tax profits, as defined,
of Clayborn and the payment of the remainder on that date.
NOTE 6 - LINE OF CREDIT
Walker maintains a revolving line of credit facility with a commercial bank,
with a borrowing limit up to 70% of eligible Walker accounts receivable. As of
January 31, 2005, the borrowing base was $700,000 and the outstanding balance
was approximately $353,000. Effective August 30, 2004, the amount available to
Walker was decreased from $1,200,000 to $700,000 to support a $500,000 letter of
credit issued in favor of Walker's surety bonding company. In August 2004,
Walker was awarded a contract of approximately $5,000,000, which required
performance and payment bonds. In order to provide the bonds, the surety bonding
company required a letter of credit for 10% of the total contract award. The
line of credit is collateralized by all of Walker's accounts receivable,
inventory and equipment and bears interest at the Wall Street Journal Prime
Index Rate plus 1.5% (6.75% as of January 31, 2005). In addition, the Company
and certain executive officers of the Company have personally guaranteed this
line of credit facility. This line is subject to annual renewal and matures on
July 30, 2005. Accrued interest is payable monthly.
17
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - STOCK OPTION PLAN
The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant (the "2002 Plan"). Under the terms of the 2002 Plan, the
options, which expire one to five years after grant, are exercisable at prices
equal to the fair market value of the stock at the date of the grant and become
exercisable in accordance with terms established at the time of the grant. At
January 31, 2005, there were 4,605,976 shares available for grant under the 2002
Plan.
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan. Had the Company measured compensation under the fair value
based method for stock options granted and amortized the cost over the related
vesting period, the Company's net loss attributable to common shareholders and
net loss per share attributable to common shareholders would have been as
follows:
Three months ended Nine months ended
January 31, January 31,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss), as reported $102,663 ($322,591) $210,321 ($434,327)
Deduct: total stock-based employee compensation
expense determined under fair value based method for all
awards, net of tax
(35,866) (51,653) (394,346) (202,413)
---------- ---------- ---------- ----------
Net income (loss), Pro forma $66,797 ($374,244) ($184,025) ($636,740)
========== ========== ========== ==========
Basic net income (loss) per share
As reported $0.03 ($0.19) $0.09 ($0.30)
Pro forma $0.02 ($0.22) ($0.08) ($0.43)
Diluted net income (loss) per share
As reported $0.03 ($0.19) $0.09 ($0.30)
Pro forma $0.02 ($0.22) ($0.08) ($0.43)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions. For the nine
months ended January 31, 2005, risk-free interest rate range of 3.51% to 3.64%,
dividend yield of 0%, expected life of 5 years and volatility range 42.1% to
44.9% were used. For the nine months ended January 31, 2004, risk-free interest
rate range of 2.1% to 3.6%, dividend yield of 0%, expected life of 5 years and
volatility range 71.0% to 73.2% were used.
As a result of amendments to SFAS 123, "Accounting for Stock-Based
Compensation", the Company will be required to expense the fair value of
employee stock options beginning with its fiscal quarter ending April 30, 2006.
18
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - SHAREHOLDERS' EQUITY
On November 16, 2004, the Company sold an aggregate of $10,000,000 of the
Company's common stock and common stock purchase warrants to eight investors.
The Company sold an aggregate of 2,083,337 shares of common stock and 2,083,337
of warrants to the investors. The common stock and the warrants were issued in a
private placement transaction pursuant to Section 4(2) under the Securities Act
of 1933. Pursuant to the terms of sale, the Company filed a resale registration
statement on December 30, 2004 covering the common stock and the common stock
issuable upon exercise of the warrants, which was declared effective by the SEC
on January 18, 2005.
Each warrant is exercisable for a period of five years at a price of $8.40 per
share, subject to certain adjustments. The exercise price of the warrants is
subject to adjustment for subsequent lower price issuances by the Company, as
well as customary adjustment provisions for stock splits, combinations,
dividends and the like. The warrants are callable by the Company, upon 30 days
notice, should the common stock trade at or above $25.20 per share for 25 out of
30 consecutive trading days. A maximum of 20% of the warrants may be called in
any three-month period.
The Company paid the placement agent of the offering a cash fee of $650,000 or
6.5% of the proceeds of the offering. In addition, the placement agent received
warrants to purchase 62,500 shares of common stock, exercisable for a period of
five years at an exercise price of $4.80 per share. The Company also paid a
finders' fee of $100,000 to another third party in connection with the offering
and incurred other related costs of $112,095. Accordingly, the Company received
net proceeds of $9,137,905 from the offering.
In connection with the sale of the common stock and warrants, the Company
effectuated a one-for-twelve reverse stock split of its outstanding common stock
on January 10, 2005. The Company also agreed to seek listing of its equity on
the Nasdaq SmallCap Stock Market.
19
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 - SEGMENT REPORTING
The Company's reportable segments are determined and reviewed by management
based upon the nature of the services, the external customers and customer
industries and the sales and distribution methods used to market the services.
The Company has two reportable segments: wireless infrastructure services and
specialty communication systems. Management evaluates performance based upon
income (loss) before income taxes. Corporate includes corporate salaries and
external professional fees, such as accounting, legal and investor relations
costs which are not allocated to the other segments. Corporate assets include
cash, prepaid expenses, fixed assets and deferred tax assets.
Segment results as of and for the three and nine months ended January 31, 2005
and 2004 are as follows:
Three Months Ended January 31, 2005 Three Months Ended January 31, 2004
Wireless Specialty Wireless Specialty
Corporate Infrastructure Communication Total Corporate Infrastructure Communication Total
--------- -------------- ------------- ---------- ---------- -------------- ------------- ----------
Revenue - $1,558,958 $9,882,019 $11,440,977 - $754,477 $3,797,823 $4,552,300
Income (loss)
before income
taxes ($237,496) $39,149 $390,851 $192,504 ($201,467) ($68,318) ($139,606) ($409,391)
As of and for the Nine Months Ended January 31, 2005 As of and for the Nine Months Ended January 31, 2004
Wireless Specialty Wireless Specialty
Corporate Infrastructure Communication Total Corporate Infrastructure Communication Total
--------- -------------- ------------- ---------- ---------- -------------- ------------- ----------
Revenue - $6,766,465 $22,248,931 $29,015,396 - $2,477,117 $11,397,499 $13,874,616
Income (loss)
before income
taxes ($912,657) $856,804 $427,910 $372,057 ($777,028) $11,442 $335,459 ($430,127)
Goodwill - $2,435,752 $11,214,042 $13,649,794 - $1,632,544 $6,335,049 $7,967,593
Total assets $2,687,680 $5,490,960 $22,619,228 $30,797,868 $348,873 $2,781,569 $11,991,946 $15,122,388
20
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto set forth in Item
1 of this Quarterly Report. In addition to historical information, this
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions, which could cause actual results to differ
materially from Management's expectations. Factors that could cause differences
include, but are not limited to, expected market demand for the Company's
services, fluctuations in pricing for materials, and competition.
Overview
WPCS International Incorporated is an engineering company that focuses on the
implementation requirements of wireless technology and specialty communication
systems. The company provides a range of services including, site design,
product integration, security, structured cabling, construction and project
management.
As a result of the acquisitions of Invisinet, Inc. on November 13, 2002 and
Walker Comm, Inc. on December 31, 2002, we experienced significant growth in our
overall business and commenced operations in two segments, specialty
communication systems and wireless infrastructure services. With the
acquisitions of Clayborn Contracting Group, Inc. and Heinz Corporation in fiscal
2004 and Quality Communications & Alarm Company in fiscal 2005, we experienced
additional growth in each of these segments.
Results of Operations
Management currently considers the following events, trends and uncertainties to
be important to understand its results of operations and financial condition:
o For the three months ended January 31, 2005, revenue was approximately
$11.4 million compared to $4.6 million for the same period a year ago.
The increase in revenue for the three months was attributable to
organic growth expansion of customer base and new contract awards of
approximately $3.3 million and strategic acquisitions of approximately
$3.5 million. For the nine months ended January 31, 2005, revenue was
approximately $29.0 million compared to $13.9 million for the same
period a year ago. The increase in revenue for the nine months was
attributed to organic growth of approximately $7.5 million and
strategic acquisitions of approximately $7.6 million.
o The Company operates in two segments, specialty communication systems
and wireless infrastructure services. With the acquisition of Clayborn
in the second quarter of fiscal 2004 and Quality in the third quarter
of fiscal 2005, we experienced additional expansion of the specialty
communication segment. With the acquisition of Heinz in the fourth
quarter of fiscal 2004, we experienced additional expansion of the
wireless infrastructure segment.
o For the three months ended January 31, 2005, the specialty
communication segment represents approximately 86% of total revenue,
and wireless infrastructure services represent approximately 14% of
total revenue. For the nine months ended January 31, 2005, the
21
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
specialty communication segment represents approximately 77% of total
revenue, and wireless infrastructure services represent approximately
23% of total revenue.
o Our primary goal is to focus on organic growth. We will also consider
strategic acquisitions of companies familiar with wireless
infrastructure and specialty communication systems. The goal for any
future acquisition will be to expand the product and service
offerings, to strengthen our project services capabilities, expand our
customer base and add accretive revenue and earnings.
o As of January 31, 2005, our backlog is approximately $17.4 million.
Our backlog is comprised of the uncompleted portion of services to be
performed under job-specific contracts or purchase orders. We expect
this backlog to be fully recognized as revenue within the next eight
months.
o Our selling, general and administrative expenses decreased as a
percentage of revenue for the three and nine months ended January 31,
2005, as compared to the same period in the prior year.
THREE MONTHS ENDED JANUARY 31, 2005
Consolidated results for the three months ended January 31, 2005 and 2004 are as
follows.
Three Months Ended
January 31,
2005 2004
----------------- --------------
REVENUE $11,440,977 100% $4,552,300 100%
----------------- --------------
COSTS AND EXPENSES:
Cost of revenue 8,547,327 75% 3,444,374 76%
Selling, general and administrative expenses 2,511,539 22% 1,416,104 31%
Depreciation and amortization 183,745 1% 99,999 2%
----------------- ---------------
Total costs and expenses 11,242,611 98% 4,960,477 109%
----------------- --------------
OPERATING INCOME (LOSS) 198,366 2% (408,177) -9%
OTHER EXPENSE:
Interest expense 5,862 0% 1,214 0%
----------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX (PROVISION) BENEFIT 192,504 2% (409,391) -9%
Income tax (provision) benefit (89,841) -1% 86,800 2%
------------------ --------------
NET INCOME (LOSS) $102,663 1% ($322,591) -7%
================== ==============
22
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue
We generate our revenue by providing project engineering and deployment services
for wireless infrastructure services and specialty communication systems. We
provide a range of engineering services including site design, construction,
product integration, structured cabling, network security, project management
and technical support.
Revenue for the three months ended January 31, 2005 was approximately
$11,441,000, as compared to $4,552,000 for the three months ended January 31,
2004. The increase in revenue for the three months was attributable to organic
growth expansion of customer base and new contract awards of approximately $3.3
million from Walker and Clayborn, and approximately $3.5 million from the
acquisitions of Heinz and Quality.
Total revenue from the specialty communication segment for the three months
ended January 31, 2005 and 2004 was approximately $9,882,000 or 86.4% and
$3,798,000 or 83.4% of total revenue, respectively. Wireless infrastructure
segment revenue for the three months ended January 31, 2005 and 2004 was
approximately $1,559,000 or 13.6% and $754,000 or 16.6% of total revenue,
respectively.
Cost of Revenue
For the specialty communication segment, cost of revenue consists of direct
costs on contracts, including materials, direct labor, subcontractor costs and
other overhead costs. In the case of the wireless infrastructure segment, cost
of revenue consists of component material costs, direct labor costs and costs
incurred for third party subcontractor services. Our cost of revenue was
approximately $8,547,000 or 74.7% of revenue for the three months ended January
31, 2005, compared to $3,444,000 or 75.7% for the same period of the prior year.
The dollar increase in our total cost of revenue is due to the corresponding
increase in revenue as a result of organic growth in revenue from Walker and
Clayborn, and the acquisitions of Heinz and Quality. The decrease in cost of
revenue as a percent of revenue is due to the revenue mix attributable to the
recent acquisitions of Heinz and Quality, partially offset by an increase in
actual costs or estimated costs which may be incurred on certain contracts that
were recognized in the third quarter of 2005.
The specialty communication segment cost of revenue and cost of revenue as a
percentage of revenue for the three months ended January 31, 2005 and 2004 was
approximately $7,310,000 and 74.0% and $2,772,000 and 73.0%, respectively. The
increase in cost of revenue as a percent of revenue is due to actual costs
incurred or estimated costs which may be incurred on certain contracts that were
recognized in the third quarter of 2005, partially offset by lower cost of
revenue on revenue attributable to the Quality acquisition.
Wireless infrastructure segment cost of revenue and cost of revenue as a
percentage of revenue for the three months ended January 31, 2005 and 2004 was
approximately $1,237,000 and 79.3% and $672,000 and 89.1%, respectively. The
decrease in cost of revenue as a percentage of revenue is due to the revenue mix
attributable to the recent acquisition of Heinz.
23
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses
For the three months ended January 31, 2005, total selling, general and
administrative expenses were $2,512,000, or 22.0% of total revenue compared to
$1,416,000 or 31.1% of revenue for the same period in the prior year. The
percentage decrease is due to the management of our cost structure as we
leverage incremental revenue dollars in fiscal 2005. Included in selling,
general and administrative expenses for the three months ended January 31, 2005
are $943,000 for salaries, commissions, and payroll taxes. The increase in
salaries and payroll taxes compared to the same period in the prior year is due
to the increase in headcount as a result of the acquisitions of Heinz and
Quality. In addition, Walker employs union employees for whom it incurred
$671,000 in union benefits during the quarter. Professional fees were $100,000,
which include accounting, legal and investor relation fees. Insurance costs were
$370,000 and rent for office facilities was $96,000. Other selling, general and
administrative expenses totaled $332,000. For the three months ended January 31,
2005, total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $2,046,000 and $235,000,
respectively.
For the three months ended January 31, 2004, selling, general and administrative
expenses were $1,416,000 or 31.1% of revenue. Included in the selling, general
and administrative expenses were $586,000 for salaries, commissions and payroll
taxes, $47,000 in professional fees, $295,000 in union benefits, insurance costs
of $199,000. Rent for our office facilities amounted to $66,000. Other selling,
general and administrative expenses totaled $223,000. For the three months ended
January 31, 2004, total selling, general and administrative expenses for the
specialty communication and wireless infrastructure segments were $1,075,000 and
$130,000, respectively.
Depreciation and amortization
For the three months ended January 31, 2005 and 2004, depreciation was
approximately $88,000 and $73,000, respectively. The increase in depreciation is
due to the acquisition of fixed assets from acquiring Heinz and Quality. The
amortization of customer lists and backlog for the three months ended January
31, 2005 was $96,000 as compared to $27,000 for the same period of the prior
year. The increase in amortization is due to the acquisition of customer lists
from Clayborn and Heinz and backlog from Heinz. All customer lists are amortized
over a period of five years from the date of their acquisition. Backlog is
amortized over a period of one year from the date of acquisition.
Net income (loss)
Net income was approximately $103,000 for the three months ended January 31,
2005. Net income is net of federal and state income tax expense of approximately
$90,000. The variation in effective tax rates between periods is primarily due
to the Heinz acquisition and certain book-to-tax permanent differences.
We incurred a net loss of approximately $323,000 for the three months ended
January 31, 2004.
24
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 31, 2005
Consolidated results for the nine months ended January 31, 2005 and 2004 are as
follows.
Nine Months Ended
January 31,
2005 2004
--------------- --------------
REVENUE $29,015,396 100% $13,874,616 100%
--------------- --------------
COSTS AND EXPENSES:
Cost of revenue 21,881,729 75% 10,084,508 73%
Selling, general and administrative expenses 6,312,547 22% 3,956,611 28%
Depreciation and amortization 430,438 2% 254,214 2%
--------------- --------------
Total costs and expenses 28,624,714 99% 14,295,333 103%
--------------- --------------
OPERATING INCOME (LOSS) 390,682 1% (420,717) -3%
OTHER EXPENSE:
Interest expense 18,625 0% 9,410 0%
--------------- --------------
INCOME (LOSS) BEFORE INCOME TAX (PROVISION) BENEFIT 372,057 1% (430,127) -3%
Income tax provision (161,736) 0% (4,200) 0%
--------------- --------------
NET INCOME (LOSS) $210,321 1% ($434,327) -3%
=============== ==============
Revenue
Revenue for the nine months ended January 31, 2005 was approximately
$29,015,000, as compared to $13,875,000 for the nine months ended January 31,
2004. The increase in revenue for the nine months was attributable to organic
growth expansion of customer base and new contract awards of approximately $7.5
million from Walker, Invisinet and Clayborn, and approximately $7.6 million from
the acquisitions of Clayborn, Heinz and Quality.
Total revenue from the specialty communication segment for the nine months ended
January 31, 2005 and 2004 was approximately $22,249,000 or 76.7% and $11,398,000
or 82.1% of total revenue, respectively. Wireless infrastructure segment revenue
for the nine months ended January 31, 2005 and 2004 was approximately $6,766,000
or 23.3% and $2,477,000 or 17.9% of total revenue, respectively.
25
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of Revenue
Our cost of revenue was approximately $21,882,000 or 75.4% of revenue for the
nine months ended January 31, 2005, compared to $10,085,000 or 72.7% for the
same period in the prior year. The dollar increase in our total cost of revenue
is due to the corresponding increase in revenue during the nine months ended
January 31, 2005 as a result of the acquisitions of Clayborn, Heinz and Quality,
internal growth in revenue from Walker, Invisinet and Clayborn and an increase
in actual costs or estimated costs which may be incurred on certain contracts
that were recognized during the period. The increase in cost of revenue as a
percentage of revenue is due primarily to an increase in the actual costs
incurred or estimated costs which may be incurred on certain contracts, offset
by the revenue mix attributable to the recent acquisitions of Heinz and Quality.
The specialty communication segment cost of revenue and cost of revenue as a
percentage of revenue for the nine months ended January 31, 2005 and 2004 was
approximately $16,820,000 and 75.6% and $8,091,000 and 71.0%, respectively. As
discussed above, the increase in cost of revenue as a percentage of revenue is
due to an increase in the actual costs incurred or estimated costs which may be
incurred on certain contracts recognized during the period, partially offset by
lower cost of revenue on revenues attributable to the Quality acquisition.
Wireless infrastructure segment cost of revenue and cost of revenue as a
percentage of revenue for the nine months ended January 31, 2005 and 2004 was
approximately $5,062,000 and 74.8% and $1,994,000 and 80.5%, respectively. The
decrease in cost of revenue as a percentage of revenue is due to the revenue mix
attributable to internal growth and the recent acquisition of Heinz.
Selling, general and administrative expenses
For the nine months ended January 31, 2005, total selling, general and
administrative expenses were $6,313,000, or 21.8% of total revenue compared to
$3,957,000 or 28.5% of revenue for the same period in the prior year. The
percentage decrease is due to the management of our cost structure as we
leverage incremental revenue dollars in fiscal 2005. Included in selling,
general and administrative expenses for the nine months ended January 31, 2005
are $2,346,000 for salaries, commissions, and payroll taxes. The increase in
salaries and payroll taxes compared to the same period in the prior year is due
to the increase in headcount as a result of the acquisitions of Clayborn, Heinz
and Quality. In addition, Walker employs union employees for whom it incurred
$1,561,000 in union benefits. Professional fees were $422,000, which include
accounting, legal and investor relation fees. Insurance costs were $861,000 and
rent for office facilities was $253,000. Other selling, general and
administrative expenses totaled $870,000. For the nine months ended January 31,
2005, total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $4,655,000 and $759,000,
respectively.
For the nine months ended January 31, 2004, selling, general and administrative
expenses were $3,957,000 or 28.5% of revenue. Included in the selling, general
and administrative expenses was $1,464,000 for salaries, commissions and payroll
taxes, $451,000 in professional fees, $840,000 in union benefits, and insurance
costs of $487,000. Rent for our office facilities amounted to $180,000. Other
selling, general and administrative expenses totaled $535,000. For the nine
26
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
months ended January 31, 2004, total selling, general and administrative
expenses for the specialty communication and wireless infrastructure segments
were $2,723,000 and $432,000, respectively.
Depreciation and amortization
For the nine months ended January 31, 2005 and 2004, depreciation was
approximately $256,000 and $173,000, respectively. The increase in depreciation
is due to the acquisition of fixed assets from acquiring Clayborn, Heinz, and
Quality. The amortization of customer lists and backlog for the nine months
ended January 31, 2005 was $174,000 as compared to $81,000 for the same period
of the prior year. The increase in amortization is due to the acquisition of
customer lists from Clayborn and Heinz, and backlog from Heinz. All customer
lists are amortized over a period of five years from the date of their
acquisition. Backlog is amortized over a period of one year from the date of
acquisition.
Net income (loss)
Net income was approximately $210,000 for the nine months ended January 31,
2005. Net income is net of federal and state income tax expense of approximately
$162,000. The variation in effective tax rates between periods is primarily due
to the Clayborn and Heinz acquisitions and certain book-to-tax permanent
differences.
We incurred a net loss of approximately $434,000 for the nine months ended
January 31, 2004.
Liquidity and capital resources
At January 31, 2005, we had working capital of $6,179,000, which consisted of
current assets of approximately $14,637,000 and current liabilities of
$8,458,000.
Operating activities used $1,454,000 in cash during the nine months ended
January 31, 2005. This was mainly comprised of $210,000 of net income plus
$403,000 in net non-cash charges, a $946,000 increase in accounts receivable,
$104,000 decrease in income taxes payable, a $42,000 increase in costs and
estimated earnings in excess of billings on uncompleted contracts, a $447,000
increase in inventory, $133,000 increase in accounts payable and accrued
expenses, $647,000 decrease in billings in excess of costs and estimated
earnings on uncompleted contracts payable and a $14,000 net increase in other
assets.
Our investing activities utilized $6,974,000 in cash during the nine months
ended January 31, 2005, which consisted of $151,000 paid for property and
equipment, $6,710,000 for the acquisition of Quality, net of cash acquired of
$164,000, and $113,000 of acquisition earn-out payments and other acquisition
transaction costs.
Our financing activities provided cash of $8,738,000 during the nine months
ended January 31, 2005. Financing activities included net proceeds from the
issuance of common stock of $9,138,000, repayments on lines of credit of
$333,000, and repayments of equipment loans and capital lease obligations of
approximately $67,000.
27
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our capital requirements depend on numerous factors, including the market for
our services, the resources we devote to developing, marketing, selling and
supporting our business, the timing and extent of establishing additional
markets and other factors. Walker maintains a revolving line of credit facility
with a commercial bank with a borrowing limit up to 70% of eligible Walker
accounts receivable. As of January 31, 2005, the borrowing base was $700,000 and
the outstanding balance was approximately $353,000. Effective August 30, 2004,
the amount available to Walker was decreased from $1,200,000 to $700,000 to
support a $500,000 letter of credit issued in favor of Walker's surety bonding
company. In August 2004, Walker was awarded a contract of approximately
$5,000,000, which required performance and payment bonds. In order to provide
the bonds, the surety bonding company required a letter of credit for 10% of the
total contract award. The line of credit is collateralized by all of Walker's
accounts receivable, inventory and equipment, and bears interest at the Wall
Street Journal Prime Index Rate plus 1.5% (6.75% as of January 31, 2005). In
addition, the Company and certain executive officers of ours have personally
guaranteed this line of credit facility. This line is subject to annual renewal
and matures on July 30, 2005.
On November 16, 2004, we sold an aggregate of $10,000,000 of the Company's
common stock and common stock purchase warrants to eight investors. We sold an
aggregate of 2,083,337 shares of common stock and 2,083,337 of warrants to the
investors. The common stock and the warrants were issued in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. Pursuant
to the terms of sale, the Company filed a resale registration statement on
December 30, 2004 covering the common stock and the common stock issuable upon
exercise of the warrants, which was declared effective by the SEC on January 18,
2005.
Each warrant is exercisable for a period of five years at a price of $8.40 per
share, subject to certain adjustments. The exercise price of the warrants is
subject to adjustment for subsequent lower price issuances by the Company, as
well as customary adjustment provisions for stock splits, combinations,
dividends and the like. The warrants are callable by the Company, upon 30 days
notice, should the common stock trade at or above $25.20 per share for 25 out of
30 consecutive trading days. A maximum of 20% of the warrants may be called in
any three-month period.
In connection with sale of the common stock and warrants, the Company
effectuated a one-for-twelve reverse split of its outstanding common stock on
January 10, 2005. The Company also agreed to seek listing of its equity on the
Nasdaq SmallCap Stock Market.
On November 24, 2004, the Company completed the acquisition of Quality
Communications & Alarm Company, Inc. of Lakewood, New Jersey, for $6.7 million
in cash, subject to adjustment. Upon completion of a formal purchase price
allocation, the amounts assigned to tangible assets, other intangible assets and
goodwill will be determined. The acquisition of Quality gives the Company
additional project engineering expertise for wireless infrastructure service
opportunities, broadens its customer base especially in the public safety sector
and gaming industry, and expands its geographic presence in the Northeastern
United States. The financing for this transaction was completed through the
issuance of the common stock as described above.
At January 31, 2005, we had cash and cash equivalents of $2,295,000, working
capital of approximately $6,179,000 and revolving lines of credit available of
$347,000. With the additional capital resources raised from the issuance of the
28
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
common stock, and internally available funds, we believe that we have sufficient
capital to meet our needs through January 31, 2006. Our future operating results
may be affected by a number of factors including our success in bidding on
future contracts and our continued ability to manage controllable costs
effectively. To the extent we grow by future acquisitions that involve
consideration other than stock, our cash requirements may increase. We also
anticipate obtaining a debt facility for the Company prior to January 31, 2006,
to assist with working capital needs as the business and customer base expands.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all
companies include a discussion of critical accounting policies used in the
preparation of their financial statements. While all these significant
accounting policies impact its financial condition and results of operations, we
view certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenue and expenses during the reporting
period. The most significant estimates relate to estimation of percentage of
completion on uncompleted contracts, valuation of inventory, allowance for
doubtful accounts, estimated life of customer lists, deferred tax valuation
allowance and the fair values of the assets and liabilities of purchased
businesses. Actual results could differ from those estimates.
Goodwill and other Long-lived Assets
We assess the impairment of long-lived assets with definite lives whenever
events or changes in circumstances indicate that their carrying value may not be
recoverable from the estimated future cash flows expected to result from their
use and eventual disposition. Our long-lived assets subject to this evaluation
include property and equipment and amortizable intangible assets. We assess the
impairment of goodwill annually in our fourth fiscal quarter and whenever events
or changes in circumstances indicate that it is more likely than not that an
impairment loss has been incurred. We are required to make judgments and
assumptions in identifying those events or changes in circumstances that may
trigger impairment.
29
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our impairment review for goodwill is based on comparing the fair value of the
related reporting unit to its carrying value. If the carrying value exceeds the
fair value of the reporting unit, we then make additional tests based on
estimated discounted cash flows. The fair value of a reporting unit is measured
at the business unit level using a discounted cash flow approach that
incorporates our estimates of future revenue and costs for those business units.
Our estimates are consistent with the plans and estimates that we are using to
manage the underlying businesses. If we fail to deliver products and services
for these business units, or market conditions for these businesses fail to
improve, our revenue and cost forecasts may not be achieved and we may incur
charges for goodwill impairment, which could be significant and could have a
material adverse effect on our financial position and results of operations.
Revenue recognition
We generate our revenue by providing project engineering and deployment services
for wireless infrastructure services and specialty communication systems. We
provide a range of engineering services including site design, construction,
product integration, structured cabling, network security, project management
and technical support.
We record revenue and profit on these contracts on a percentage-of-completion
basis on the cost-to-cost method. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts. Contracts are generally considered substantially complete when
engineering is completed and/or site construction is completed. We include in
operations pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when we
determine that we are responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer.
We have numerous contracts that are in various stages of completion. Such
contracts require estimates to determine the appropriate cost and revenue
recognition. Cost estimates are reviewed monthly on a contract-by-contract
basis, and are revised periodically throughout the life of the contract such
that adjustments to profit resulting from revisions are made cumulative to the
date of the revision. Significant management judgments and estimates, including
the estimated cost to complete projects, which determines the project's percent
complete, must be made and used in connection with the revenue recognized in the
accounting period. Current estimates may be revised as additional information
becomes available. If estimates of costs to complete long-term contracts
indicate a loss, a provision is made currently for the total loss anticipated.
Recently issued accounting pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity and requires that those instruments be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003. The adoption of this statement did not have a material impact on our
consolidated financial position and results of operations.
30
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No. 123 and will be effective for public
companies that are small business issuers for interim or annual periods
beginning after December 15, 2005. The new standard will require us to expense
employee stock options and other share-based payments. The FASB believes the use
of a binomial lattice model for option valuation is capable of more fully
reflecting certain characteristics of employee share options compared to the
Black-Scholes options pricing model. The new standard may be adopted in one of
three ways - the modified prospective transition method, a variation of the
modified prospective transition method or the modified retrospective transition
method. We are currently evaluating how we will adopt the standard and
evaluating the effect that the adoption of SFAS 123(R) will have on our
financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, with earlier application permitted for inventory
costs incurred during fiscal years beginning after the date this Statement was
issued. The adoption of SFAS No. 151 is not expected to have a material impact
on our financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position and
results of operations.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief or
current expectations of us and members of its management team as well as the
31
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the Securities and
Exchange Commission. Important factors currently known to Management could cause
actual results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that its assumptions are
based upon reasonable data derived from and known about our business and
operations and the business and operations of the Company. No assurances are
made that actual results of operations or the results of our future activities
will not differ materially from its assumptions.
32
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. As of January 31, 2005,
the Company's management carried out an evaluation, under the supervision
of the Company's Chief Executive Officer and the Chief Financial Officer of
the effectiveness of the design and operation of the Company's system of
disclosure controls and procedures pursuant to the Securities and Exchange
Act , Rule 13a-15(d) and 15d-15(d) under the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective, as of the date of their evaluation, for the purposes of
recording, processing, summarizing and timely reporting material
information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934 except as explained below.
In connection with its review of the Company's financial statements for the
three and nine months ended January 31, 2005 included in this quarterly report
on Form 10-QSB for the three months ended January 31, 2005, J.H. Cohn LLP, the
Company's independent registered public accounting firm ("J.H. Cohn") brought to
the attention of the Company's management and Audit Committee that the Company
had initially understated its provision for income taxes by improperly reversing
deferred tax liabilities arising from an acquisition. The Company subsequently
adopted additional procedures to address this deficiency.
b) Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting, that occurred during the period
covered by this report that has materially affected, or is reasonably
likely to materially effect, the Company's internal control over financial
reporting.
33
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 16, 2004, we sold an aggregate of $10,000,000 of the Company's
common stock and common stock purchase warrants to eight investors. We sold an
aggregate of 2,083,337 shares of common stock and 2,083,337 warrants to the
investors. The common stock and the warrants were issued in a private placement
transaction pursuant to Section 4(2) under the Securities Act of 1933. Pursuant
to the terms of sale, the Company filed a resale registration statement on
December 30, 2004 covering the common stock and the common stock issuable upon
exercise of the warrants, which was declared effective by the SEC on January 18,
2005.
Each warrant is exercisable for a period of five years at a price of $8.40 per
share, subject to certain adjustments. The exercise price of the warrants is
subject to adjustment for subsequent lower price issuances by the Company, as
well as customary adjustment provisions for stock splits, combinations,
dividends and the like. At any time after the registration statement is
effective, the warrants are callable by the Company, upon 30 days notice, should
the common stock trade at or above $25.20 for 25 out of 30 consecutive trading
days. A maximum of 20% of the warrants may be called in any three-month period.
Approximately $6.9 million of the net proceeds were used for the acquisition of
Quality Communications & Alarm Company, Inc. and related costs. The balance of
the net proceeds will be used for working capital.
The following table provides information about purchases by us and our
affiliated purchasers during the quarter ended January 31, 2005 of equity
securities that are registered by us pursuant to Section 12 of the Securities
Exchange Act of 1934:
34
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
ISSUER PURCHASES OF EQUITY SECURITIES
(c)
Total Number of Shares (d)
(a) (b) (or Units) Purchased as Maximum Number (or Approximate
Total Number of Average Price Part of Publicly Dollar Value) of Shares (or
Shares (or Units) Paid per Share Announced Plans or Units) that May Yet Be Purchased
Period Purchased) (or Unit) Programs (1) Under the Plans or Programs (1)
- ----------------- ---------------- -------------- ---------------------- --------------------------------
11/01/04-11/30/04 0 $0 0 0
12/01/04-12/31/04 0 $0 0 0
1/01/05- 1/31/05 0 $0 0 0
(1) We have not entered into any plans or programs under which we may repurchase
its common stock.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 12, 2004, a majority of the shareholders of the Company approved the
reverse stock split on a one-for twelve basis, the outstanding common stock of
the Company.
ITEM 5 OTHER INFORMATION
Not applicable.
ITEM 6 EXHIBITS
31.1 - Certification of Principal Executive Officer pursuant to
Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
31.2 - Certification of Principal Financial Officer pursuant to
Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities
and Exchange Act of 1934, as amended
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
35
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WPCS INTERNATIONAL INCORPORATED
Date: March 17, 2005 By: /s/ JOSEPH HEATER
-----------------
Joseph Heater
Chief Financial Officer
36